Stock Price Reactions to Announcements of Related Party Transactions*

Cynthia Afriani Utama

Sidharta Utama

Abstract

reactions in response to investment announcements made by firms listedon the Indonesian Stock Exchange (JSX) depend on 1) the nature of relationbetween transacting parties (Related Party Transaction (RPT) or Non-Related Party Transaction (Non-RPT)); and 2) the type of firms (part ofgroup affiliation or not). This study constitutes an event study, i.e., toexamine cumulative abnormal returns (CAR) surrounding the date ofinvestment announcements. The study finds that the stock price reaction(as measured by CAR) for RPT is lower than that for Non-RPT. Therefore,the market perceives that RPT is subject to wealth expropriation bycontrolling shareholders to minority shareholders, and that this perceptionis eventually reflected in the relatively lower market reaction. Further, thestudy finds (albeit weak) that the stock market reaction for firms in groupaffiliations is lower than for those in non-group affiliations. Under thecondition of inadequate supervision and ineffective law enforcement, firmsin group affiliations can easily conduct expropriation without beingconcerned about being detected by the regulator.Keywords: Group Affiliation, Investment Decision, Minority Shareholders,Related Party Transaction, Wealth expropriation